Auditing Quiz 4

Front 1

Three types of transactions processed by the revenue process

Back 1

1. Sale of goods or service for cash or credit
2. Receipt of cash from the customer in payment of goods/service
3. Return of goods from customer for credit or cash

Front 2

Before revenue is recognized, it must be

Back 2

realized and earned

Front 3

Revenue is realized when

Back 3

when a product or service is exchanged for cash, a promise to pay cash, or other assets that can be converted into cash

Front 4

Revenue is earned when

Back 4

when an entity has substantially completed the earnings process, which generally means a product has been delivered or a service has been provided

Front 5

Four specific inherent risk factors in revenue process

Back 5

1. Industry-related factors
2. Complexity of revenue recognition issues
3. Difficulty of auditing transactions and account balances
4. Misstatements detected in prior years

Front 6

Steps of control risk assessment

Back 6

1. Understanding/documenting the revenue process based on a reliance approach
2. Planning/performing tests of control on revenue transactions
3. Setting control risk for revenue process
4. If the results of the tests of controls support the
planned level of control risk, the auditor conducts
the planned level of substantive testing

Front 7

P(ERCV) concerns of revenue process

Back 7

All revenues and receipts have been disclosed properly

Front 8

(P)E(RCV) concerns of revenue process

Back 8

All revenue transactions have occurred (and are not recorded in a period earlier than they occurred-cutoff). All receivables exist.

Front 9

(PE)R(CV) concerns of revenue process

Back 9

Any factored A/R have been accounted for properly.

Front 10

(PER)C(V) concerns of revenue process

Back 10

No revenues and receipts transactions have been left out (and are not recorded in a period later than they occurred-cutoff).

Front 11

(PERC)V concerns of revenue process

Back 11

All accounts are classified properly, recorded at the correct amount and A/R is recorded at NRV

Front 12

The primary concern of revenue transactions

Back 12

Occurence

Front 13

The auditor is concerned about two major types of material misstatements for occurrence:

Back 13

1. Sales to fictitious customers
2. Recording revenue when goods have not been shipped or services have not been performed

Front 14

Concerns concerning occurrence (of revenue transactions) include:

Back 14

1. Segregation of duties
2. Sales recorded only with approved customer order and shipping document
3. Make sure there aren’t extra sales invoice numbers
4. Monthly customer complaints handled independently
5. To avoid revenue being recorded in wrong period (cutoff problem), all shipping documents forwarded to billing function daily; daily billing of goods shipped.

Front 15

Controls concerning completeness (of revenue transactions) include:

Back 15

1. Accounting for numerical sequence of shipping
2. Documents and sales invoices (none left out),
3. Matching shipping documents with sales invoices,
4. Reconciling sales invoices to daily sales reports.

Front 16

Revenue transaction valuation misstatements include:

Back 16

1. Recording a revenue transaction at an incorrect dollar amount (accuracy)
2. Sales invoice billed for inaccurate dollar amount
3. Goods shipped to bad credit risks (collectibility, NRV of A/R issue)

Front 17

Revenue transaction valuation misstatements (part 2):

Back 17

1. Proper procedures for authorizing credit and shipment of goods
2. Authorized price list and specified terms of trade
3. Sales invoices agreed to shipping documents and customer order for product type and quantity
4. Mathematical accuracy of sales invoices verified

Front 18

Classification of revenue transactions control concerns (of revenue transactions)

Back 18

The use of a chart of accounts and proper codes
for recording transactions should provide adequate
assurance about the proper classification of
revenue transactions.

Front 19

Substantive testing in the revenue process

Back 19

1. Substantive analytical procedures
2. Substantive tests of details of classes of transactions, account balances, and disclosures

Front 20

Examples of revenue transaction substantive analytical procedures

Back 20

Analytical procedures of Sales, A/R, Allowance for Doubtful Accounts, Bad Debt Expense, Sales Returns and Allowances

Front 21

Examples of substantive tests of details of classes of transactions, account balances, and disclosures

Back 21

Tests of revenue transactions
Tests of the A/R balance

Front 22

What are some non-misstatement reasons
why GP % could appear unusual relative to
prior year or industry?

Back 22

Selling more higher gross profit items will increase overall gross profit %

Front 23

The most common substantive test of transactions in the revenue process

Back 23

Cutoff testing

Front 24

Cutoff testing verifies

Back 24

Are all transactions tested recorded in the proper period?
Existence or occurrence?

Front 25

Auditing Standards require Confirmation of a sample of A/R unless:

Back 25

1. A/R is immaterial
2. Use of confirmations is ineffective (response rate is low)
3. IR and CR are low and other procedures are sufficient

Front 26

A/R confirmations are effective in discovering:

Back 26

1. fictitious accounts (existence)
2. incorrect amounts (mechanical accuracy)
3. cutoff problems (primarily existence,
but also completeness)

Front 27

Positive A/R confirmations

Back 27

request that the debtor
respond whether or not the balance is correct or
they ask the debtor to indicate the amount owed
at a certain date

Front 28

Negative A/R confirmations

Back 28

request a response only if the debtor believes that the amount printed on the confirmation is incorrect

Front 29

Is positive or negative A/R confirmations weaker?

Back 29

Negative is considered weaker test because a non-response could mean that account is okay, but could also be that customer failed to respond for some reason -- can’t differentiate.

Front 30

When to use negative confirmation?

Back 30

1. The auditor has assessed low IR and low CR
2. The auditor has no reason to think the customer won't respond
AND
3. There are a large number of small A/R balances

Front 31

A/R confirmation sequence

Back 31

1. Obtain A/R aging and select sample.
2. Print and mail confirmations. (who?)
3. Analyze results and investigate disputed amounts. (like what?)
4. Do a second or third mailing if necessary.
5. Perform alternative procedures.

Front 32

Exceptions to A/R confirmation sequence

Back 32

1. Goods not received by customer (timing difference/ goods delivered to wrong customer/ invoice sent to wrong customer/ fictitious sale
2. Payment not recorded in client’s records (timing diff/ payment applied to wrong cust. Acct./ cash misappropriated
3. Goods returned by customer (timing diff or situation like Regina)
4. Processing error
5. Amounts in dispute (price of goods in dispute, goods don’t meet specifications, goods damaged in transit.

Front 33

Alternate procedures to determine existence and accuracy of A/R

Back 33

1. examine cash receipts journal, bank
accounts, and bank statements for evidence of subsequent cash receipt of
year-end A/R
2. examine bills of lading and shipping documentation
3. examine sales invoices

Front 34

If the likely misstatement is less than the Tolerable Misstatement

Back 34

Accept the account as fairly presented

Front 35

If the likely misstatement is greater than the Tolerable Misstatement

Back 35

Account is not fairly presented

Front 36

What is the primary audit objective with regard to payables?

Back 36

Completeness

Front 37

What audit procedures will address the completeness of payables?

Back 37

1. inquire of management regarding completeness of payables
2. perform analytical procedures on payables
3. perform a search for unrecorded liabilities

Front 38

Searching for unrecorded liabilities

Back 38

1. Examine the unpaid vendors’ invoice file after the balance sheet date
2. Examine vendors’ statements for purchases in the last few days of the year and the first few days of the subsequent year
3. Examine cash disbursements for several days subsequent to year-end to determine if the related liability was recorded at year-end. Tie these cash disbursements back to receiving reports.

Were the transactions recorded in the appropriate period?

Front 39

What audit procedures will address the accuracy of payables?

Back 39

1. Recalculate year-end accruals (interest, wages, taxes, vacation benefits, warranties)
2. Recalculate amortization of bond premiums and discounts
3. Confirm a sample of A/P balances

Front 40

Contingent liability

Back 40

a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place

Front 41

Contingent liability is probable and reasonably estimated

Back 41

accrual with footnote disclosure

Front 42

Contingent liability is reasonably possible

Back 42

footnote disclosure

Front 43

Contingent liability is remote

Back 43

no financial statement effect

Front 44

How to search for unrecorded contingent liabilities

Back 44

1. Inquire management
2. Review - IRS correspondence, minutes to meetings, client attorney invoices, existing auditing workpapers
3. Letters of confirmation from all client attorneys

Front 45

What are the primary audit objectives with regard to inventory?

Back 45

Existence and valuation

Front 46

What is the most effective way to test if inventory exists?

Back 46

Physical evidence

Front 47

Inventory observation is required by

Back 47

GAAS

Front 48

How to verify that inventory was owned

Back 48

1. Perform cut off testing comparing whe goods were received and shipped (FOB shipping terms)
2. Are goods on consignment? Are goods in a public warehouse?

Front 49

What is the purpose of cutoff tests?

Back 49

To make sure goods (transactions) are recorded in the proper period

Front 50

How would you test inventory and purchases cutoff?

Back 50

1. For purchases of inventory - test dates of purchase orders, receive reports, invoice from vendor
2. For sales of inventory - test dates of invoices to customers and shipping documents

Front 51

If testing existence for A/R

Back 51

Confirm large balance

Front 52

If testing completeness

Back 52

Confirm smallest or 0 balance, vendors were left off the A/P list

Front 53

What is the major concern of A/P?

Back 53

Small or 0 balance accounts

Front 54

Value =

Back 54

Cost * Inventory

Front 55

How do we test that the inventory is properly valued in accordance with GAAP?

Back 55

Test quantity and inventory pricing (costs) tests

Front 56

Quantity test

Back 56

1. Observe physical count
2. Trace quantities from physical inventory tags or sheets to final listing
3. Scan inventory listing for large $ amounts and trace back to tags or sheets

Front 57

Inventory pricing (cost) tests

Back 57

1. Test the cost accounting system at interim (test purchase prices, perpetual records) trace prices on final inventory listing to audited price lists
2. Test listing for mathematical accuracy
3. Test for obsolescence (NRV)

Front 58

At the conclusion of testing, the auditor should

Back 58

aggregate all identified misstatements
the likely misstatement is compared to the tolerable misstatement allocated to the inventory account.

Front 59

Likely misstatement < Tolerable misstatement

Back 59

Inventory account is fairly presented

Front 60

Likely misstatement > Tolerable misstatement

Back 60

Not fairly presented

Front 61

There should be segregation of duties for these accounts receivable functions:

Back 61

1. Receive customer order
2. Approve credit
3. Ship goods
4. Prepare invoice and update A/R records
5. Receive remittance/cash receipt
6. Authorization of write-off